In Re Henderson
JUDGMENT
Based upon the Findings of Fact and Conclusions of Law made in the attached Order of the Court, First Citizens Bank’s motion for relief from the automatic stay is granted pursuant to 11 U.S.C. § 362(d)(1) and (2). First Citizens is granted in rem relief and the filing of any bankruptcy petition in any jurisdiction within the six month period following the entry of the Order shall not operate to stay First Citizens’ efforts to collect its debt and foreclose on the Property.
ORDER
This matter comes before the Court on motion of First Citizens Bank (“First Citizens”) for relief from the automatic stay (“Motion”). This Court has jurisdiction pursuant to 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (K), and (0). Pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding pursuant to Fed. R. Bankr.P. 7052, the Court makes the following Findings of Fact and Conclusions of Law. 1
FINDINGS OF FACT
1. Maude H. Henderson and Daniel S. Henderson, IV Irrevocable Trust (“Debt- or”) filed a petition for relief under chapter 11 of the Bankruptcy Code on March 28, 2008. 2 The petition is signed by William Madison Worthy, II (‘Worthy”) for Debt- or. Debtor’s petition indicates that it is a single asset real estate case as defined by 11 U.S.C. § 101(51B).
2. Worthy is a trustee for Debtor, which is a trust formed for the benefit of Worthy’s five children.
3. The only asset of Debtor is real property located at 732 Springs Avenue, Pawley’s Island, South Carolina (“Property”).
4. Debtor holds approximately a seventy percent interest in the Property. Worthy and his wife equally share the remaining interest in the Property.
5. First Citizens holds a first and second mortgage in the Property. The debt owed to First Citizens exceeded two million dollars as of the date of the hearing on the Motion.
6. Prior to the petition in this case, a South Carolina state court appointed a receiver to collect rents and manage the Property for the benefit of creditors. Worthy obtained funds being held in trust by the receiver and appropriated those funds to his personal use. Worthy is subject to a rule to show cause in state court with regard to his failure to return the funds he appropriated.
7. The Property was subsequently sold through a public foreclosure sale on No
8. Two days prior to the foreclosure sale becoming final, Worthy filed a petition under chapter 11 of the Bankruptcy Code (the “Worthy Case”). The filing of the Worthy Case stayed the foreclosure and First Citizens’ ability to take title to the Property.
9. In the Worthy Case, First Citizens moved for relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2).
10. Following an evidentiary hearing, the Court granted First Citizen’s motion for relief from stay in the Worthy Case on January 29, 2008. The Court found that Worthy was unable to provide adequate protection, there was no equity in the Property, and the Property was not necessary for an effective reorganization that was within reasonable prospect. 3
11. Following the lifting of the automatic stay in the Worthy Case but prior to the petition date in this case, First Citizens resumed its efforts in state court to sell the Property through foreclosure. It re-advertised the foreclosure sale and the Property was again sold at a public foreclosure sale to First Citizens on March 3, 2008.
12. Five days prior to the second foreclosure sale becoming final, Debtor filed the petition in this case which again stayed the foreclosure and First Citizens’ ability to take title to the Property.
13. Debtor’s schedules indicate that the value of the Property is $2,250,000.00.
14. Debtor’s amended schedules filed April 11, 2008 indicate that First Citizens and Georgetown County are the only creditors of Debtor.
15. Debtor’s tax returns, schedules, and statement of financial affairs indicate Debtor is not currently generating income from the Property and that the Property has not generated income to Debtor for the two-year period prior to the petition date.
16. First Citizens filed the Motion on April 4, 2008. First Citizens seeks relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2) and seeks in rem relief from the automatic stay for Debtor’s bad faith conduct. 4
17. Debtor opposes the Motion. Debt- or contends that First Citizens is adequately protected and that Debtor can make payments to bring the debt current.
18. First Citizens proffered that adequate protection would equal the debt payment to it for both mortgages, which would be $17,887.30 per month 5 if it re-amortized a portion of the debt over a fifteen year period at 6.56% per annum. Debtor did not dispute this proffer and asserted that it was capable of making such monthly payments to First Citizens.
19. First Citizens presented testimony of Walter Krask, an appraiser. First Citizen’s appraiser presented credible and persuasive testimony that the Property is currently worth $2 million based upon an appraisal he performed April 22, 2008.
6
20. Worthy testified that the Property generated rental income in the past two years and that he is able to pay $18,000.00 per month from his personal income to service the debt to First Citizens. Worthy also testified that he estimates that the Property can generate $70,000.00 to $85,000.00 per year in rental income and that Debtor has entered into a rental agreement with a company that will lease the Property and pay the proceeds of the rental income to First Citizens. Debtor has failed to submit an application required by 11 U.S.C. § 327 to obtain approval of this Court to hire a professional to lease the Property. Worthy failed to offer convincing evidence to substantiate his claim of a lease agreement or his claim of sufficient personal income to make payments in the amount of $18,000.00 per month. 8 Worthy acknowledged that Debt- or does not produce sufficient income to make the debt service payments to First Citizens. Worthy testified that Debtor’s present intentions are to keep the Property rather than to sell it, as was his intent in the Worthy Case, and to use his income and the rental income to pay First Citizens.
CONCLUSIONS OF LAW
11 U.S.C. § 362(d)(1) and (2) allow parties to seek relief from the automatic stay for cause, including lack of adequate protection, and if there is no equity in the Property and the Property is not necessary for an effective reorganization.
9
First Citizens bears the burden of proof on the validity of its lien, the amount of its debt, and Debtor’s lack of equity.
10
See
11 U.S.C. § 362(g)(1);
In re
Worthy, C/A No. 07-06712-W, slip op. (Bankr.D.S.C. Jan. 29, 2008). Debtor bears the burden of proof on all other issues including lack of cause, the existence of adequate protection, and the necessity of collateral for an effective reorganization that is within rea
I. First Citizens is Entitled to Relief From Stay Pursuant to 11 U.S.C. § 362(d)(1)
Cause to lift the automatic stay includes lack of adequate protection or any other grounds for cause, including bad faith.
See In re Brown,
C/A No. 01-12506-W, slip op. (Bankr.D.S.C. Jun. 4, 2002) (finding cause to lift the automatic stay for a debtor’s bad faith). “The phrase ‘adequate protection’ is defined in § 361 in sufficiently broad terms that courts and commentators have uniformly concluded that such protection may be provided by a creditor’s equity cushion....”
Nations-Bank of Virginia, N.A. v. DCI Publishing of Alexandria, Inc.,
First Citizens is not adequately protected by the value of the Property. Debtor failed to offer any persuasive evidence that First Citizens is now adequately protected by the value of the Property a mere three months after the stay was lifted in the Worthy Case for lack of adequate protection.
11
The credible evidence from First Citizens’ appraiser indicates that First Citizens is in a worse position in this case since the value of the Property has declined and the debt owed to it has increased. Based upon the credible and persuasive testimony from First Citizens’ appraiser, the Court finds that the Property is worth $2 million, which is less than the amount of the agreed upon debt. Therefore, the Court finds that the Property’s value does not adequately protect First Citizens.
See In re Kinard,
C/A No. 01-03621-W, slip op.,
First Citizens is also not adequately protected by the assurance of payment. Considering the accrual of real estate taxes, insurance costs, the interest on such a significant indebtedness,
12
and the depreciation of the Property, the Court finds that adequate protection payments would be in the range of $15,000.00 per month. Worthy admitted that the Debtor does not and cannot generate sufficient income to make such an adequate protection payment or the debt payments that would be required in a chapter 11 plan. In light of Debtor’s inability to adequately protect First Citizens, Debtor appears to be relying on voluntary contributions from Worthy to make the adequate protection payments for it. Although there appears to be no prohibition on non-debtor parties making adequate protection payments for a debtor, such payments must be within reasonable prospect.
See In re Young,
II. First Citizens is Entitled to Relief From Stay Pursuant to 11 U.S.C. § 362(d)(2)
First Citizens has presented persuasive evidence that there is no equity in the Property, in as much as the debt exceeds the value of the Property. Debtor has also failed to demonstrate that the Property is necessary for an effective reorganization. In order for property to be necessary for an effective reorganization, reorganization must be within reasonable prospect.
See United Savings Association of Texas v. Timbers of Inwood Forest
As
sociates, Ltd.,
III. The Court Grants First Citizens In Rem Relief
First Citizens’ moved to grant its Motion “with prejudice” to prohibit Debtor or any other party from filing a bankruptcy petition for a period of 180 days, which would give rise to an automatic stay covering the Property. This request would grant
in rem
relief for First Citizens to prohibit the Property from being protected by the automatic stay in subsequent cases by Debtor or any non-debtor.
15
This Court may also
sua sponte
take action to prevent abuse of process, including granting a creditor
in rem
relief.
See
11 U.S.C. § 105(a);
In re Gonzalez-Ruiz,
“In order to appropriately grant
in rem
relief, the record must clearly demonstrate an abuse of the bankruptcy process through multiple filings with the sole purpose of frustrating the legitimate efforts of creditors to recover their collateral.”
Price,
Both this case and the Worthy Case were strategically filed on the eve of the foreclosure sales becoming final. Both cases were filed to protect a common asset.
See In re Hartley,
Finally, the Court finds that Debtor’s bad faith also warrants the
in rem
relief.
See McCray,
“Subjective bad faith means an intent by the debtor to abuse the protections of Chapter 11 and to cause hardship or delay to creditors, without any real ability to reorganize.”
See In re Belair 301-50
N.W.
Quadrant Commercial Properties, Inc.,
1. The debtor has one asset;
2. Secured creditors’ liens encumber the asset;
3. There are generally no employees except for the principals and there is no ongoing business activity;
4. The debtor has little or no cash flow and no available sources of income to sustain a plan of reorganization or make adequate protection payments;
5. There are few, if any, unsecured creditors whose claims are relatively small;
6. There are allegations of wrongdoing by the debtor or its principals;
7. The timing of the debtor’s filing evidences an intent to delay or frustrate the legitimate efforts of secured creditors to enforce their rights;
8. The debtor is afflicted with the “new debtor syndrome” in which a one asset entity is created or revitalized on the eve of foreclosure to isolate the insolvent property and its creditors;
9. There is no realistic possibility of reorganization of the debtor’s business;
10. The reorganization essentially involves a two-party dispute; and
11. Bankruptcy offers the only possibility of forestalling loss of the property.
See In re Dunes Hotel Associates,
Debtor has only one asset that is fully encumbered by First Citizens’ lien. Debt- or does not indicate that it has any employees. Debtor’s sworn schedules and tax returns indicate that it has had no cash flow for two years, which contradicts Worthy’s testimony that Debtor has earned some rental income during the past two years. This income is not sufficient to sustain a plan of reorganization to pay First Citizens and there appears to be no realistic ability of Debtor to reorganize. There are no unsecured creditors and this case is essentially a two-party dispute between the owners of the Property, which includes Worthy and Debtor, and First Citizens, given that the only other creditor, which is owed real property taxes, will be paid through foreclosure.
16
The timing of this bankruptcy and the Worthy Case were strategically aimed at forestalling foreclosure and hindering the collection efforts of First Citizens. Bankruptcy appears to be the only possibility for Debtor and the co-owners to forestall the inevitable loss of the Property. There are sufficient admissions of wrongdoing by Debt- or’s principal. Worthy, as trustee of Debtor, has admitted appropriating funds obtained by a court appointed receiver, for the benefit of creditors, to his personal use and to inaccuracies in the sworn schedules in the Worthy Case. Finally, it appears that Debtor has made inconsistent representations to this Court. The schedules and statement of financial affairs in this case, signed by Worthy under penalty of perjury, and Debtor’s tax returns, each indicate no income for Debtor for the past two years and are inconsistent with Worthy’s testimony that Debtor has earned rental income during the past two years.
17
Considering the
Dunes
factors and the totality of the circumstances, there is clear
There is also clear evidence that this case is objectively futile. “The objective futility inquiry is designed to insure [sic] that there is embodied in the petition ‘some relation to the statutory objective of resuscitating a financially troubled debt- or.’ ”
Carolin,
IY. Waiver of 4001(a)(3) is Denied
Lastly, First Citizens moved to waive Fed. R. Bankr.P. 4001(a)(3), which provides a temporary stay of an order lifting the automatic stay similar to that available under Fed. R. Bankr.P. 8005. This rule was added by the 1999 amendments to the Federal Rules of Bankruptcy Procedure and provides a temporary breathing spell for a debtor to appeal and obtain a stay pending appeal thereby avoiding the potential devastating consequences that stay relief can have on the success of the bankruptcy case.
See In re A Partners, LLC,
This Court has not identified any clear standard for determining whether the rule should be waived when the debtor, as in this case, contests the waiver of the rule.
See In re Thomas,
CONCLUSION
Based upon the foregoing, the Motion is granted and the automatic stay is lifted pursuant to 11 U.S.C. § 362(d)(1) and (2). First Citizens is granted in rem relief, pursuant to the Motion or this Court’s sua sponte authority under 11 U.S.C. § 105(a), and the filing of any bankruptcy petition in any jurisdiction within the six month period following the entry of this Order shall not operate to stay First Citizens’ efforts to collect its debt and foreclose on the Property.
AND IT IS SO ORDERED.
Notes
. To the extent any Findings of Fact constitute Conclusions of Law, they are adopted as such. To the extent any Conclusions of Law constitute Findings of Fact, they are so adopted.
. By separate motion, First Citizens has moved to dismiss this case on grounds that Debtor is not eligible to be a debtor under Title 11.
. Worthy moved to dismiss the Worthy Case and that motion was granted on March 17, 2008.
. First Citizen’s Motion characterizes its request for in rem relief as a request for an order granting the motion for relief from stay with prejudice.
. The debt payment assumes that First Citizens is willing to re-amortize the first mortgage, which is currently due in full.
. In the Worthy Case, the parties merely presented older appraisals indicating that the Property was worth $2.2 million. The Court found in the Worthy Case that the Property was worth $2.2 million, for purposes of the
. Debtor attempted to impeach the credibility of First Citizens’ appraiser with older appraisals performed in previous years. Debtor did not lay a foundation for the introduction of these older appraisals into evidence and therefore the Court does not give weight to the valuation of the Property in this older appraisals. Debtor also attached certain appraisals to his certification of facts in this matter but these appraisals were also not introduced into evidence and therefore cannot be considered as evidence for purposes of the hearing on the Motion.
See In re Morysville Body Works, Inc.,
. The success of the Worthy Case was also based upon anticipated substantial income by Worthy, which was also not substantiated by credible and convincing evidence.
. Debtor incorrectly argued that the standard for stay relief is irreparable harm.
. In this case, Debtor has not disputed the validity of the lien or the amount of the debt and the foreclosure would appear to be res judicata on these issues. See In re Ford, C/A No. 05-44958-W, slip op. at 4-5 (Bankr.D.S.C. Mar. 10, 2006) (finding a foreclosure was res judicata as to the validity of the lien and the amount of the debt, which could not be challenged in bankruptcy via an objection to claim).
. Debtor offered the general testimony of Worthy about a previous appraisal performed on the Property, the real estate taxes owed, and his general opinion that the Property is appreciating; however, it introduced no specific evidence indicating the present value of the Property. First Citizens introduced a 2006 appraisal by Walter Krask indicating that the Property was valued at $2.2 million at that time; however, the Court does not find this to be persuasive evidence as to the current value of the Property considering the recent appraisal by Walter Krask.
. It appears that the amount of interest on a commercially reasonable loan would exceed $11,000.00 per month.
. Although Worthy testified that he now makes sufficient income to make such payments to First Citizens, his credibility is weakened by his admitted misappropriation of funds from the receiver and the failure of his personal bankruptcy in which this Court found that the ability of Worthy to confirm a chapter 11 plan was not within reasonable prospect. His credibility is also weakened by his admission in this case that his sworn schedules in the Worthy Case are inaccurate and the inconsistencies between Worthy's testimony regarding Debtor’s earnings and the sworn schedules in this case, signed by Worthy, and Debtor's tax returns, which each indicate Debtor has had no income for the past two years. Debtor and Worthy failed to offer independent evidence to substantiate Worthy's claim of his ability to make debt payments to First Citizens.
.The Court would also lift the stay for cause due to Debtor's bad faith, as discussed herein.
. Congress has codified the right to
in rem
relief in 11 U.S.C. § 362(d)(4). First Citizens did not specifically plead for relief under 11 U.S.C. § 362(d)(4); however, Debtor did not challenge the sufficiency of First Citizens’ pleadings and acknowledged that First Citizens was seeking
in rem
relief. Moreover, "Congress gave no indication in enacting § 362(d)(4) that it intended to prevent bankruptcy courts from employing 11 U.S.C. § 105(a) ... to enter orders, when necessary or appropriate, to prevent the harm arising from abusive filings. If anything, the 2005 amendments evidence a congressional intent that the courts crack down on abusive filings by debtors”.
In re McCray,
. Debtor also amended its schedules to indicate it owed income taxes, which appears to be inconsistent with its tax returns for 2006 and 2007 that indicate no taxable income.
. Debtor has also indicated various inconsistent values of the Property in its submissions to this Court (i.e. $2.25 million in the original schedules, $2.5 million in the certification of facts, and $2.8 million in the amended certification of facts filed on the eve of the hearing on the Motion). It introduced no evidence to substantiate these values.
. The Court finds that bad faith should be imputed to any other co-owners of the Property considering the orchestrated efforts of the Property’s owners to forestall collection efforts by First Citizens.